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A PEG Ratio can also be a negative number if a stock's present income figure is negative (negative earnings), or if future earnings are expected to drop (negative growth). PEG ratios calculated from negative present earnings are viewed with skepticism as almost meaningless, other than as an indication of high investment risk.
Stock B is trading at a forward P/E of 30 and expected to grow at 25%. The PEG ratio for Stock A is 75% (15/20) and for Stock B is 120% (30/25). According to the PEG ratio, Stock A is a better purchase because it has a lower PEG ratio, or in other words, its future earnings growth can be purchased for a lower relative price than that of Stock B.
PVGO can then also be used in relative valuation, i.e. when comparing between two investments (see similar re PEG ratio). PVGO is calculated as follows: PVGO = share price − earnings per share ÷ cost of capital.
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios...
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From this relationship we recognize immediately that P–E cannot be related to growth by a simple rule of thumb such as the so-called "PEG ratio" /; it also depends on ROE and the required return, T. The T-model is also closely related to the P/B-ROE model of Wilcox [3]
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When the dividend payout ratio is the same, the dividend growth rate is equal to the earnings growth rate. Earnings growth rate is a key value that is needed when the Discounted cash flow model, or the Gordon's model is used for stock valuation. The present value is given by: